Wednesday, September 07, 2005 | The City Council was unable to fully restock the depleted retirement board and it chose not to oust its controversial president Tuesday. Three individuals nominated for pension board posts effectively bowed out and the proposal to remove Peter Preovolos fizzled after several council members initially argued that the board’s president had to go.

Although the council approved one nominee, the 13-member body overseeing the embattled San Diego City Employees’ Retirement System is still short three members at a time when some city officials are seeking strength in numbers – namely, the seven votes needed to fully waive the attorney-client privilege and turn over requested documents to investigators of all types.

The council split 3-to-3 on whether to remove Preovolos, falling short of the five votes needed to oust the man who has served as the outspoken leader of the system since July.

Preovolos has been overwhelmingly criticized for failing to take the waiver of the attorney-client privilege. Auditors say they must have access to protected pension documents if they are to certify the municipality’s stalled financial statements for 2003 and 2004.

Deputy Mayor Toni Atkins, Councilwoman Donna Frye and Councilman Brian Maienschein voted for Preovolos’ ouster. Councilmen Scott Peters, Jim Madaffer and Tony Young voted to keep Preovolos on the board.

Representatives of the Municipal Employees Association, the largest of City Hall’s labor unions and the most public opponents of the efforts to rollback employee pensions, also came out to council chambers to support Preovolos.

In addition to the waiver issue, City Attorney Mike Aguirre has also accused Preovolos of breaching his fiduciary duties for not addressing the pension system’s underfunding and for excessively spending pension fund money on litigation before allowing an independent investigation.

“There is a substantial basis for removing Mr. Preovolos if you should decide to exercise your authority and keep the commitment to the public to have an independent pension board,” Aguirre said, referring to the passage of a proposition last November that reconfigured the pension board’s composition to add more appointed trustees.

Preovolos contends that the most independent way he could act would be to not take orders from Aguirre or the City Council.

The SDCERS board last Tuesday agreed to hand over specific documents that were protected by the attorney-client privilege to investigators from the U.S. Attorney’s Office, the Securities and Exchange Commission, the District Attorney’s Office and the independent audit committee. Each group is investigating various allegations of wrongdoing in the pension system and the city’s financial disclosure process.

It is unclear whether the gesture – which stops short of an actual waiver – will satisfy auditor KPMG, which has asked for access to certain protected documents before it certifies the city of San Diego’s financial statements for fiscal year 2003.

Preovolos and a handful of council members argue that the batch that was turned over was sufficient, although Aguirre and others on council said there was no proof that the tens of thousands of pages now in investigators’ and auditors’ possession will amount to a certification.

Like Preovolos, Peters and Madaffer said they believe the bundle turned over last week after a federal judge ordered them released will also serve to satisfy the audits. In an interview Tuesday, Preovolos said KPMG was at fault for not producing the audits by now because the protected material is not necessary for the firm to issue a bill of health for the city’s books.

“It is beyond me why a city of this magnitude hires an audit firm and allows them to pussyfoot around for two years and continues to be hoodwinked by a firm that is failing to do a proper job,” said Preovolos, who was appointed by former Mayor Dick Murphy this spring. “Enough’s enough. Issue the reports.”

KPMG officials, as well as the outside audit committee headed by former SEC chairman Arthur Levitt, have urged the pension board to waive the confidentiality guarding documents many say are crucial to figuring out the city’s true financial standing. City officials have admitted that errors and omissions were made regarding their financial standing in several annual financial reports and bond disclosures, spawning an investigation by the SEC, which is in progress.

Peters and Madaffer said Preovolos should be spared for the time being, given that the board complied with the judge’s request to turn over the sought documents. Peters said that, in a conversation with Lynn Turner of the outside audit committee, he felt reassured that the city was on the right path.

“Lynn Turner said he was optimistic,” Peters said.

Turner, in an interview last week, said that he would meet with the SDCERS board to determine whether they were sufficient for the audit. Aguirre and Preovolos said it would take several weeks before the tens of thousands of pages included in the bundle released last week could be reviewed.

Madaffer had publicly called for the pension board president’s ouster in prior weeks, and he and Peters both said they would support removing Preovolos in the future if it was apparent that he was engaged in wrongdoing or was breaching his fiduciary duties.

Preovolos said he did not attend the council meeting where his removal was considered because his “appearing would have legitimized what would have been a wrong action.”

“I could care less. I don’t report to them,” Preovolos said. “The problem is they want to intimidate the board, scare them out and pack the board with people that will do their bidding.”

The council was charged with finding replacements on the board when four of Murphy’s nominees resigned in July after Aguirre sued the trustees individually in an attempt to have a series of pension benefits deemed illegal and possibly turn management of SDCERS over to a court-appointed expert.

Atkins put forth four names to serve as trustees for the pension fund, which currently has a funding shortfall of at least $1.37 billion and is the focus of ongoing local and federal investigations.

Of the four individuals submitted, the council was only able to appoint Thomas Hebrank, a certified public accountant from Kensington, after two nominees refused to serve as trustees given the SDCERS board’s current makeup and one said his work commitments were too demanding.

Former pension trustee Diann Shipione, who blew the whistle on the system’s underfunding, has been recommended three times in the last few months by various city officials and refused the post each time. Last Wednesday, she told Atkins that she would not serve unless all seven of the council-appointed slots on the board were replaced with a new group.

“It would be unfair to appoint any person of good will and judgment to the board under such circumstances,” Shipione wrote. “I recommend you leave the empty places on the board empty, and let those currently on the board continue on their own hostile path with the burden of their decisions still before them.”

Anti-tax activist Richard Rider, who ran unsuccessfully to replace Murphy in the July election, said he would not serve alongside Preovolos. He is currently traveling in Europe and was unavailable for comment.

The third to defect from nomination was Ezekiel Cortez, a local attorney who said that he felt the commitment of serving as a SDCERS trustee would negatively effect his clients.

Given the criticism and apparent problems swirling the pension fund, Hebrank said he was honored by the nomination and accepted the post because he wanted to help his city.

He said that he would support waiving the confidentiality guarding the board’s documents if he had all the facts about what was at stake and what the documents contained and if it was clear to him that waiving was necessary.

“Obviously, there are a lot of issues that need to be dealt with and lots to be done,” he said. “My primary responsibility is to the plan’s participants.”

Please contact Evan McLaughlin directly at

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